U.S. investors face the growing risk of missing out on Shein's potentially huge IPO as the fast-fashion giant with Chinese roots considers holding it in London instead. Dealmakers in New York once reaped huge profits from the IPOs of Chinese companies; Now they're wondering whether the regulatory clouds that emerged after the debacle of Didi Global Inc.'s U.S. initial public offering in 2021 will ever clear. With the first IPO of a Chinese company in New York worth more than a billion US dollars after Didi safely on the books in February, investors are waiting to see whether Shein can also break out of the impasse – and what kind of Chinese IPOs they are in the US means when they fail.
How did Shein become controversial?
Shein's roots in China played a big role in their initial success, but in some ways they've come back to capitalize on it. Founded in 2008, the e-commerce pioneer gained attention in 2021 when it became the most downloaded shopping app in the US, overtaking Amazon. The company managed to more than triple its revenue during the Covid-19 pandemic, to a staggering $10 billion in 2020, making it the largest web-only fashion brand in the world.
The company's overwhelming success is due to its data savvy, favorable tax treatment of small packages and, more controversially, its vast network of contract manufacturers who offer thousands of teen-friendly models every day at extremely low prices. Critics and competitors have attacked the company over concerns about the environmental impact of disposable fashion, pay and working conditions for those who assemble garments, anti-competitive behavior and even evidence that some of the cotton in its clothing was produced using forced labor.
A 2022 study by Bloomberg News found that garments shipped to the U.S. by Shein were made from cotton from China's Xinjiang region, where the U.S. State Department has alleged human rights abuses against the Uyghur people, which China denies. A statement from a company spokesman said Shein has a zero-tolerance policy toward forced labor and requires its contract manufacturers to source cotton only from approved regions.
Can Shein's critics stop the IPO?
The potential IPO was a lightning rod for politicians like Marco Rubio. The Republican senator asked the U.S. Securities and Exchange Commission to consider blocking the listing in a February letter after reports the company had asked Chinese regulators for permission. Rubio said the company needs to disclose more about its operations in China even though it has moved its headquarters to Singapore.
Take the UK, whose IPO market could use a boost – especially one the size of Shein's should it reach the $50 billion valuation of private deals. Shein is considering a London listing instead, and British Finance Minister Jeremy Hunt has already held talks with Shein Chief Executive Donald Tang, Bloomberg News reported in February. That too could face political resistance, but the urgent need to keep the IPO bankers in London could outweigh this.
What about other Chinese IPO plans in the US?
Chinese company executives remember the days when things were different. Alibaba Group Holding Ltd.'s $25 billion IPO in New York in 2014 was the largest ever at the time, and numerous startups from the country were attracted to the large, liquid U.S. market that did not rely on making profits going public.
The decline in U.S.-China relations was matched in 2021 when Beijing launched a cybersecurity investigation into Didi just days after its $4.4 billion U.S. exchange, citing concerns about foreign access data that had national security implications.
The ride-hailing company's crash and eventual delisting heralded a series of crackdowns on the country's tech sector that effectively halted large-scale Chinese initial public offerings in the United States. About a year and a half later, attitudes have softened and regulators have toned down their rhetoric about restrictions on foreign listings as long as the companies comply with requirements regarding the use of personal data and state secrets.
Despite the softening sentiment, new IPOs in China remain largely small and rare. Not a single Chinese issuer raised more than $200 million in the U.S. last year, a far cry from 2021 when a dozen companies each raised more than that figure.
Things are looking a little better this year, if not for the conventional offerings. Lotus Technology Inc., an electric vehicle unit of China's Zhejiang Geely Holding Group Co Ltd., went public in New York through a merger with a blank-check vehicle.
The IPO of Amer Sports Ltd. January's $1.4 billion is by far the biggest since Didi, but also an outlier. Although the maker of Wilson tennis rackets, Salomon ski boots and Arc'teryx outdoor gear is majority owned by a Chinese-led consortium, its roots and much of its current operations are in Europe and the US, making it less vulnerable a regulatory perspective.
Amer said in its IPO filing that its lawyer believes it does not require approval from the country's securities regulator. In contrast, China's Internet regulator is subjecting Shein to a strict investigation into its handling of data.
Will things soon go back to the way they were?
That's unlikely given the tensions, even for companies that aren't under scrutiny from members of the U.S. Congress.
The SEC has raised concerns about the quality of Chinese companies' risk disclosures and continues to demand more of them to protect investors. New guidance on this issue was published last July. At the same time, Chinese companies are coming under pressure from domestic regulators because of warnings about so-called “risk factors” in their US prospectuses.
Under new overseas listing rules introduced in 2021, Beijing bans investment banks from posting comments that misrepresent or disparage China's laws and policies or the state's business environment and legal situation, the Financial Times reported in January.
Unless U.S. and Chinese regulators come to an agreement on the risks of investing in Chinese companies, there is little chance that the once-powerful pipeline of IPOs between China and the U.S. will get back on track.
If not New York, then where?
Shein and other companies caught up in the China-US dispute – including TikTok owner ByteDance Ltd. – have options, although none are as attractive as a spot on the New York Stock Exchange or Nasdaq. Hong Kong would be a better alternative for Shein than London, some investors say, given comparable Chinese rivals with large e-commerce presences such as Alibaba and Tencent Holdings Ltd.
If a London IPO doesn't go as expected, the company could turn to Singapore, whose IPO market is in even worse shape than London's. Any venue change would require Shein to submit a new application to Chinese regulators, who would request additional materials and clarifications.
By Dong Cao, Yiqin Shen and Pei Li
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